
The mystery has been solved--the reason Sarah Palin displayed an Israeli flag in her Alaska governor's office is that she loves the country:
Sarah Palin Mesmerizes Israeli Filmmaker
...."She had an Israeli flag, of all the things, mounted on her office wall, and I have that on film" he said. "I was very surprised to see that and when I asked her about it, she said that she loves Israel and the she had friends who visited the country and brought her the flag."
The rest of the article has more on Palin, including confirmation that she seems to be largely guileless. Which is why she never thought of parlaying her closet Zionism into political advantage.